Main Street Monday — Senate Small Business Chair Warns Increasing SBA 7(a) Defaults Jeopardize Zero Subsidy Model
March 3, 2025
Bob Coleman
Founder & Publisher
Main Street Monday — Senate Small Business Chair Warns Increasing SBA 7(a) Defaults Jeopardize Zero Subsidy Model
[Editor note: Zero subsidy is no cost to the taxpayer as SBA 7(a) program fees offset loan guaranty losses.]
Last week’s Senate hearing, “Managing Risk for the Long-Term in the 7(a) Loan Program,” highlighted five major concerns raised by Chair Joni Ernst:
1. Rising SBA 7(a) loan defaults
2. Increasing payouts for SBA 7(a) loan guarantees to lenders
3. Loosening of credit underwriting standards
4. The awarding of an SBLC license to Funding Circle
5. The impact of waiving guaranty fees for 7(a) loans less than $1 million on the zero subsidy rate.
Said Senator Ernst:
“Nearly two years ago, we met to discuss the reckless new rules the Small Business Administration (SBA) implemented for the 7(a) loan program.
“They removed time-tested underwriting standards that mitigated the risk of default for American taxpayers who guarantee these loans.
“These new rules also opened the door to foreseeable fraud by enabling a potentially unlimited number of unregulated, non-depository institutions to become permanently licensed SBA lenders as Small Business Lending Companies, or SBLCs.
“I aggressively sought to understand how the SBA was selecting and approving these new SBLCs to participate in 7(a).
“The types of lenders the SBA was looking to license – fintechs – were responsible for facilitating widespread financial fraud and improper payments in the Paycheck Protection Program.
“Two years later, we still have little insight. Even the recent SBA’s Inspector General (IG) report on the subject was woefully inadequate.
“The IG didn’t bother to investigate whether there was collusion between SBA officials and one of the largest applicants for a lending license, Funding Circle US.
“Nor did the report answer why the SBA and the IG concluded the cash position of Funding Circle US was sufficient, despite the fact that it was losing millions.
“The Biden SBA’s dangerous loosening of the underwriting and eligibility rules weren’t the only efforts to undermine the financial soundness of the 7(a) loan program.
“A year before the rule, the agency started to cut the fees charged to borrowers and lenders—fees meant to protect the taxpayer from having to subsidize bad loans.
“For three years straight, the SBA cut these fees, inexplicably allowing loans of up to one million dollars to be made without the borrower or lender having to pay for the guarantees the American taxpayer provided.
“We are seeing the impacts of these rule changes, with the 12-month default rate more than doubling to roughly 3.2 percent since these rules went into effect, and defaults on loans less than 18 months old nearly tripling to almost one and a half percent over that same period.
“While the Biden-Harris SBA tried to blame this on rising interest rates, defaults on SBA loans have been increasing faster than those in the private sector, which is evidence of poor policy decisions.
“It should come as no surprise that for the first time in 12 years, 12 years, the 7(a) program lost money.
“This negative cash flow must be immediately addressed by reversing the misguided decisions of the past administration.
“This program was designed to operate with zero subsidy – and I worry we are on the cusp of forcing taxpayers to foot the bill, something we should avoid at all costs.
“I want to commend Administrator Loeffler for her recognition of these problems in her day one memo released this week and her willingness to hit the ground running.
“It is clear that the solvency of the SBA’s lending programs is a major priority for the Administrator, who has committed to doing what’s necessary to ensure their zero-subsidy status is secure.”